Oil companies will defy the gloom overshadowing many other industries when they start to report earnings this week, with analysts forecasting tens of billions of dollars in fourth-quarter profits.
But the outlook is dimmer for the coming year: early projections compiled by S&P Capital IQ have the five western oil supermajors collectively earning $150bn in 2023, down from an estimated $200bn haul in 2022.
The deceleration in oil producers’ cash machine comes after energy prices pulled back from highs reached last year after Russia’s full-scale invasion of Ukraine. But even with a $50bn decline in annual profits, the companies would still rake in their second-highest earnings ever recorded.
The US major Chevron kicks off Big Oil’s earnings season on Friday, followed by ExxonMobil next Tuesday and Europe-based Shell, BP and TotalEnergies in early February.
The five companies’ combined profits for the last three months of 2022 are forecast to be $41.8bn, up more than 40 per cent from $29.4bn a year before, according to S&P Capital IQ.
Their earnings are expected to be down 18 per cent from the third quarter, however. Exxon flagged in a regulatory filing this month that lower commodity prices would reduce fourth-quarter earnings by as much as $4.1bn from its record-smashing $19.7bn in the third quarter. The warning still puts Exxon on track for one of its most profitable quarters on record.
Sajjad Alam, an analyst at Moody’s, said last year’s huge cash influx had put the sector “in the best place I have seen in the last 15 years. They will have a lot of flexibility in terms of how they want to use record levels of cash flow.”
Reflecting this strength, Chevron on Wednesday announced it will repurchase $75bn of shares over an unspecified number of years.
Governments’ increased focus on energy security after the Ukraine invasion has brought back some of the investors who shunned fossil fuel producers over climate-damaging emissions, analysts say.
The market’s “peak ESG concerns have been fading”, said Matt Portillo, an analyst at Texas-based investment bank TPH, referring to environmental, social and governance investing. As investors shifted focus back to the companies’ core oil and gas businesses, it has been “constructive for the equities,” Portillo said.
Oil and gas stocks led the Wall Street benchmark S&P 500 last year for the second year in a row, rising around 40 per cent compared with the broad index’s 14 per cent decline. Fourth-quarter earnings from companies in the S&P energy sub-index are expected to be 56 per cent higher year on year, while earnings across the index will decline by 6 per cent, according to Credit Suisse.
Shares of US oil supermajors have outpaced European rivals, which have faced investor questions about their planned pivots away from fossil fuels. Still, the European companies are expected to report a sharp rise in fourth-quarter profits compared to 2021.
US shale oil and gas producers, led by companies such as Pioneer Natural Resources, Devon Energy and Occidental Petroleum, have undergone an especially pronounced economic revival, turning out record amounts of free cash flow after more than a decade of dismal returns.
Rystad Energy, a consultancy, expects the shale sector to produce about $120bn of free cash flow, or money left over after operating and capital expenses, in 2023. That would be down from $156bn last year but a reversal from years when spending exceeded profits.
Shale companies have shifted away from using cash to fund aggressive new drilling campaigns towards handing the lion’s share back to shareholders through dividends and stock buybacks.
This in turn has tempered production growth and helped prop up oil prices. Analysts will be watching shale companies’ drilling plans this earnings season for signs of a renewed focus on growth.
“Drill, baby, drill is still in the DNA of the industry . . . but they realise now that unabated growth is no longer in their corporate interest, and I think it will stay that way,” said Matthew Bernstein, an analyst at Rystad.
US president Joe Biden has slammed the big spending on dividends and buybacks at a time of high prices for consumers, calling it unacceptable “during a time of war”.
But analysts do not expect the political pressure to derail the companies’ strategy and say pressure could now ease after last November’s election and a retreat from record-high prices at the fuel pump.
“There’s a lot of hand-waving in the political arena, but at the end of the day the companies are going to do right by shareholders,” Portillo said.
Fossil fuel producers could also benefit from another rise in oil and gas prices this year as analysts warn that energy supplies remain tight.
Goldman Sachs is among a number of Wall Street banks that expect crude prices to climb back above $100 a barrel later this year as China sucks in more fuel to propel its economic reopening, following the lifting of strict Covid-19 policies, and western sanctions weigh on Russian output.
Yet the prospect of an economic slowdown continues to hang over the sector, with some oil executives arguing that a downturn is looming.
Chevron chief executive Mike Wirth said at the World Economic Forum in Davos last week that it was “quite likely that we do see a recession this year”, pointing to weakening commodity prices in recent months as a sign the “economy is slowing”.